Taxation and Development – The Key to the End of Aid Dependency

Last week at the High Level Forum on Aid Effectiveness in Busan, South Korea, I participated in one of the more interesting events of the conference: the session on “Domestic Resource Mobilization: Taxation and Development.” If you think that sounds like watching paint dry, you couldn’t be more wrong. That is because it is the ultimate solution for achieving sustainable development. When developing countries have enough revenues to pay for their own development, they need no longer depend on foreign donors.

Lately this has been a widely discussed issue among donors, civil society organizations and developing countries at the conference – aid dependency and aid effectiveness. It is also critical to the course of development. Several keynote speakers in Busan mentioned the issue.

Other panelists included the President of the African Development Bank, the Secretary General of the OECD as well as ministers from several other countries. During the session, we explored creative ways for developing countries to generate domestic resources to finance their own development — specifically through innovations in tax administration, IT system modernization and, economic policies that foster stronger government accountability.

Several countries have made great strides in this area, and were able to share their experience with the participants and attendees.

A decade ago, Georgia had one of the worst reputations in the former Soviet Union for bribe-taking and corruption in all branches of government, including its tax and customs departments: 83% of businesses complained about the level of corruption involved with the tax authorities in 2002. But after the Rose Revolution and the election in 2004 of a reform government, this quickly began to change. Reorganization and other reforms of the tax and customs departments (funded by USAID, the IMF and the EU) led to dramatic improvements. By 2008, only 8.4% of businesses complained about expectations of bribes by tax officials.

El Salvador offers another example of dramatic improvement in governance and accountability in tax administration. USAID and the Government focused on improvements to the IT system and applications of the tax department. These modernizations led to an increase in revenue collection from 2004 to 2010 by about 1.5 percentage points of GDP – or $350 million per year (more than six time the average annual assistance from USAID)! The funding provided the Salvadorian government additional means of investing in the country’s own development.

Both Georgia and El Salvador improved accountability, reduced corruption, and increased public revenue dramatically with the help of USAID teams working with them.

The lessons from these two countries show us that better tax administration has the potential to contribute to a virtuous cycle of growth within a society. The United State Government’s Domestic Resource Mobilization for Development (DF4D) initiative is working to support similar reforms in other developing countries.

In the Middle East and North Africa, in support of the Arab Spring, DF4D is partnering with the OECD to host an international open governance conference in the region in spring 2012 to showcase best practices on domestic resource mobilization, transparency and anti-corruption as key tools to strengthen institutions and private sector development.

DF4D is also partnering with the new government of Tunisia to explore innovative ways to improve domestic resource mobilization and anticorruption efforts domestically.

Thanks to the African Tax Administration Forum (ATAF) and the Organization for Economic Co-operation and Development (OECD) for hosting this program and for their commendable work to elevate the importance of these issues.